Former Licensee Knocks Wind Out Of Sail Manufacturer’s Trade Secrets Claims

In the fiercely competitive world of professional sailing, every second matters. And, as with any sport, competitors look to gain any advantage they can by getting their hands on the latest equipment, fine-tuned to give them even the slightest advantage. This demand for the best equipment creates the same kind of competition among manufacturers, which can lead to battles over IP, licensing deals, and trade secrets.

A federal court judge in Michigan recently dismissed a sail manufacturer’s trade secrets claims against a former licensee, concluding that plaintiff Quantum Sail Design Group, LLC had not proved that its manufacturing process constituted a trade secret.

Quantum designs, manufactures, and sells high-performance membrane or “string” sails for use on racing and cruising yachts. Prior to its relationship with Quantum, defendant Jannie Reuvers Sails, Ltd., known as “JRS,” produced cross-cut and tri-radial sails made from cloth but had no experience producing membrane sails. The dispute arose in 2013 when JRS, which had been producing sails for Quantum since 2007, terminated the parties’ business relationship. Quantum filed suit alleging various claims, including those for misappropriation of trade secrets, trademark infringement, unfair competition, and breach of contract.

Procedurally, the court reached its decision in response to JRS’s motion to narrow the issues pursuant to Federal Rule of Civil Procedure 16(c). Specifically, JRS sought to dismiss Quantum’s claims for breach of the parties’ trade secret agreement and violation of the Michigan Uniform Trade Secrets Act (MUTSA), such that the only remaining claim would be for breach of the parties’ international affiliate licensee agreement. Noting that Rule 16 motions were uncommon in the Western District of Michigan, the court found it appropriate to apply the Rule 56 summary judgment standard to this motion.

The court initially held that Quantum was entitled to an order directing JRS to cease and desist from using any “build files” in its possession. The build files contained information that would enable anyone in possession to manufacture the sails disclosed in those files, and JRS did not appear to dispute that these files constituted trade secrets.

The remaining issue became whether Quantum’s manufacturing/lamination process used in sail making was entitled to trade secret protection. Noting that “novelty is essential to a trade secret”, the court focused its analysis on the fact that numerous competitors used the same or similar manufacturing processes and concluded that Quantum did not possess a trade secret entitled to protection.

The court acknowledged that a number of the other trade secret factors favored Quantum’s argument. Quantum had made substantial investments of time, effort, and money in developing its process. It proved (and JRS didn’t dispute) that no one at JRS had any experience or knowledge about the process for manufacturing membrane sails until the parties’ business relationship began. And Quantum presented several pieces of evidence in the form of contracts pertaining to trade secrets and confidential information to show that it had taken reasonable efforts to maintain the secrecy of its process.

Nonetheless, the court agreed with JRS’s argument that the process for producing membrane sails is so well known and widely used in the sail-making industry that Quantum’s process can’t possibly be considered a trade secret.

Quantum acknowledged that certain elements of its manufacturing process were known or used by others, but it argued that its process as a whole was not generally known by its competitors. The court disagreed, noting that even though competitors probably do not know all of the details of Quantum’s process, the basic process is well known in the industry.

Quantum argued that the court must focus on its entire process rather than on its separate components. The court acknowledged this test and the supporting case law Quantum cited but pointed out the fact that the case law required Quantum to show that its unified process comprises a “unique combination” and that Quantum had failed to make such a showing.

One takeaway point for trade secrets plaintiffs: The need for specificity in arguing for trade secret protection. Quantum pointed to the competitive advantage created by its manufacturing process, to which the court replied skeptically, noting that it “does not doubt that Quantum produces membrane sails that are superior to those produced by many of its competitors” but that the experience and expertise that underlie Quantum’s competitive advantage can’t be protected as a trade secret.